Evaluating the Impact of the Proposed Risk Retention

Comprised of nearly 400 pages and requesting responses to close to 200 questions, the April 29, 2011 Credit Risk Retention proposal is overwhelming. In consideration of the enormity of the request, the American Bankers Association has requested an extension of the comment deadline from June 11 until July 22, 2011. Whether the extension request will or will not be honored is yet to be seen; however, prudence dictates that community bankers begin to analyze the impact on their credit activities of the proposal. Of specific concern is whether or not current product offerings, both consumer and commercial, will fall under the category of “qualified” thereby being exempt from the proposed risk retention requirement.

The proposal includes criteria under which the various types of credit are evaluated for the purpose of being “qualified” and, thus, exempt from the risk retention requirements. The criteria proposed for each of the product types fall into the same broad categories, but differ somewhat based on the specific type of credit and borrower. The proposal also provides specific exemptions from risk retention, in general relating to collateral and/or loan guarantee programs.

The process of evaluating the impact on the institution will begin with an inventory of the credit products offered. Clearly those products that meet the exemption based on collateral or guarantee programs can be excluded from further analysis. Similarly, the institution may exclude credit products that will not be sold from the analysis. The remaining credit products will need to be evaluated under the product-specific criteria of qualified credits. In this preliminary analysis a comparison of the proposed thresholds to the institution’s underwriting criteria should be completed and documented.

This analysis provides two results: first, credit products with underwriting standards in contravention of the proposed standards will be identified; second, the process will help to identify criteria may need to be evaluated on a procedural or a loan-by-loan basis. In the first result, for example, a residential purchase money mortgage program including a junior lien to reduce the down payment will absolutely not meet the proposed qualified standard. Under the second, the analysis will identify those criteria under a low-doc loan program where further analysis is needed.

Early identification of the credit products that may be in jeopardy, all be it under proposed criteria, allows management to explore the balance sheet implications of continuing to offer non-qualified products and, if needed, to identify the availability of alternate products to meet the credit needs of their customers. When the criteria is finalized, any changes from the proposed criteria should prove relatively easy to integrate, allowing you to focus on implementing the new products and/or processes you’ll need to continue to serve the credit needs of your customers.